China’s Turn to Outperform, India’s to Struggle, Barclays says

By Ben Levisohn

Sam Panthaky/Agence France-Presse/Getty Images

Barclay’s Aaron Gurwitz calls the case for China an easy one to make in a note to clients today, the one for India, not so much.

The basis for his China call: easy-to-beat growth expectations, historically attractive valutations, improving earning momentum and the strong potential for continued structural growth. Toss in the fact the he believes China will will let the yuan rise and the prospect for economic reforms, and he has little doubt that China should outperform this year. The iShares FTSE China Index (FXI) exchange-traded fund has gained 16% this year.

The outlook for India, on the other hand, looks much less rosy. As in China, investors have gotten excited about the potential for reform, and iShares India Index (INP) exchange-traded note has jumped 6.4% during the past month. The chances of success in India, however, are far lower in China, Gurwitz notes, because of the “uncertainty over whether the government can maintain this program of change in the face of continued opposition from its political opponents.”

The fundamentals, meanwhile, look less than stellar:

Economic growth fell to 5.3% in the third quarter of 2012. Monetary policy is likely to remain relatively tight as the high inflation rate has yet to decline significantly—October’s Wholesale Price Index was 7.45%, albeit below expectations of 7.9%. And the current-account deficit remains a risk to the currency and capital markets in US dollar terms. Investors may also grow skittish at the end of 2013, as they anticipate the country’s parliamentary and presidential elections in the second quarter of 2014.

The upshot: “For now, we maintain a neutral stance on Indian equities as well as corporate credits,” Gurwitz says.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.